Corporate Governance Foundations

CEO Pay Ratio

1950: 20 to 1, 2014: 216 to 1 compared to average worker.

Corporate Social Responsibility (CSR)

Company's responsibility to operate ethically and contribute to society.

Legitimacy

Congruence between organization's activities and society's expectations.

Anglo-American Model of Governance

Corporate governance model emphasizing shareholder primacy.

Director-Primacy Model

Corporate governance model where boards are ultimate decision-makers.

Board Independence

Crucial for good governance; outside directors are independent.

Ownership and Control

Distinguishing between precorporate and corporate ownership.

Legitimation

Dynamic process for a business to perpetuate its acceptance.

Spring-loading

Granting stock option at today's price with insider knowledge of value increase.

Board of Directors

Group governing and overseeing management of the business.

Inside Directors

Have ties to the firm.

Evolution of Corporate Governance

Historical development, issues, and current trends.

Corporate Accountability

Holding corporations responsible for their actions and decisions.

Stakeholder Groups

Include owners, boards, managers, employees, and other stakeholders.

Board Diversity

Increasing variety in board composition for better decision-making.

Outside Directors

Independent from the firm.

Red Flags for Board Problems

Indicators like restated earnings, poor morale, or missed goals.

Shareholder Activists

Individuals exerting pressure on corporate management for governance improvement.

Managers

Individuals hired by the Board to manage the business daily.

Employees

Individuals hired to perform operational work in the business.

Investor Relations

Interactions between a company and its investors to maintain a good relationship.

Shareholder Engagement

Involving shareholders in company decision-making and activities.

Transparency

Key in ethics and stakeholder management.

Dodd-Frank Act

Legislation covering reforms for banks, credit agencies, insurance, and more.

Sarbanes-Oxley Act of 2002

Legislation limiting nonauditing services and requiring financial disclosure.

Business Judgment Rule

Protects board members acting in good faith for the company's interests.

Tipper

Provides material non-public information.

Backdating

Purchase stock at yesterday's price for immediate gain.

Tippee

Receives material non-public information.

Outside Directors Compensation

Recent idea; median pay rose from $175,800 to $258,000 (2003-2015).

SEC

Regulatory body protecting investor interests, criticized for business focus.

Avoiding Governance Failures

Strategies to prevent governance failures and maintain legitimacy.

Hierarchy of Authority

Structure showing levels of authority within the corporation.

CEO Pay Controversy

Surrounding excessive executive compensation.

SEC's Role in Investor Protection

The Securities and Exchange Commission's responsibility to safeguard investors.

Legitimate Company Loss

Explains governance failures leading to loss of legitimacy.

Shareholder-Primacy Model

Gives ultimate control to shareholders who own stock in the firm.

Corporate Governance

Method of governing, directing, and controlling a firm.

Shareholder Democracy Movement

Movement advocating for majority vote, banning staggered boards, and proxy access.

Banning Classified Boards

Preventing electing board members in staggered terms for faster replacements.

Business Ethics in Governance

Principles and standards guiding ethical behavior in business operations.

Retirement Packages

Under scrutiny; George Hager Jr. received $5.2M 'retention payment.'

Improving Corporate Governance Suggestions

Various proposals to enhance corporate governance effectiveness.

CEO Monitoring

Boards oversee CEO performance and can dismiss underperforming CEOs.

Shareholder Activism

Actions taken by shareholders to influence business practices and governance.

Clawback Provisions

Allow company to recoup CEO pay in case of financial restatement or misbehavior.

Stock Options

Allow purchase of stock in the future at today's price.

Proxy Access

Allows shareholders to propose nominees for the board of directors.

Warren Buffett's Shareholder Meeting

Annual meeting known as a 'Woodstock weekend for capitalists' by CEO Warren Buffett.

Insider Trading

Buying/selling securities with non-public material information.

Mediating Hierarchs

Boards balancing stakeholder interests and having a duty to the corporation.

Material Information

Data affecting stock price and available to insiders.

Discussion Activity on Governance Models

Debate on the pros and cons of shareholder-primacy and director-primacy models.

Bullet Dodging

Delaying stock option grant after bad news.

Improving Corporate Governance

Enhancing ethics, sustainability, and stakeholder management.

Shareholder Voice Strengthening

Enhancing the influence and participation of shareholders in governance.

Sustainability in Governance

Ensuring practices that promote long-term sustainability in corporate governance.

Legitimacy in Corporate Governance

Linking legitimacy issues to the structure and practices of corporate governance.

Boards of Directors Criticisms

Major criticisms faced by Boards of Directors in corporate governance.

Majority Vote

Requirement for board members to be elected by a majority of votes cast.

Say on Pay

Response to concerns over excessive executive compensation.

Mergers and Acquisitions

Threat of takeover motivates shareholder interest; CEOs use poison pills and golden parachutes.